ELC 498

1. ELC 498 Internet taxation

2. Agenda • Last case not graded • Need one more grade sheet (Rob) • Final exam posted • Due Dec 21 @ 12 noon • Higher score on Final replaces lower score on Midterm • Written Case studies and presentations due Wednesday, Dec 19 @ 1 PM • 15 min MAX on presentations

3. Overview • Introduction • Precedents and Mail Order Sales • Interests and their stakes • US Congressional Activity • State Activity: California • International Activity • Companies Weigh In • Internet Taxation 2007

4. Introduction (Brief History) • Oct 21, 1998 • The Internet Tax Freedom Act (ITFA) • No new taxes till 2001 • May 10, 2000 • US House passed H.R. 3709; Internet Non-discrimination Act INA • No new taxes till 2006 • Argument for law is • PRO- Taxes stifle growth • CON - States and municipalities losing revenue • An Important note • Federal law controls interstate and international commerce but not intrastate commerce

5. Precedents and Mail Order Sales • US Supreme Court • "the power to tax involves the power to destroy", • 1819 McCulloch v. Maryland, 17 U.S. 316 • Ruled that mail order merchants were required to collect sales tax only from residents in sates where the merchant had a “nexus”. • 1967 National Bellas Haus v. Department of Revenue of the State of Illinois • 1992 Quill v. North Dakota • States reacted by creating “Use Tax” • Feared reduction of tax base • Use requires voluntary disclosure for “small” items • http://www.maine.gov/revenue/salesuse/use%20tax.htm • 0.04% of AGI ($40,000  $16) in Maine

6. Precedents • Offline merchants claimed online merchants had financial advantage • Online merchants argued • advantage was nullified by increased distribution cost • Since they were not using state services why should they pay state tax

7. ITFA • 1998 • 3 year moratorium on new Internet taxes • Creates Advisory Commission on Electronic Commerce (ACEC) • 19 members • 8 from industry and consumer groups • 8 from state and local governments • 3 from Clinton Administration • Study issues and report by April 2000 • 3 camps • Some taxations as long as its equitable • No taxes at all • Recoup state and local losses

8. ACEC • Deliberations unproductive, many possibilities • Flat tax • No Tax • Credit card companies collect taxes • WTO ban taxes world wide • Make ITFA permanent • No consensus achieved • Internet Non-discrimination Act extended moratorium 5 years (2006)

9. Interests and their Stakes • Internet users • 75%  less likely to buy • Online vendors – no taxes • Too complex • Would lose customers • Limits growth • Organizations against • ITAA, IBM, MCI-WorldCom, Microsoft, AEA • New Organizations formed (no taxes) • Global Business Dialogue on Electronic Commerce • Internet Tax fairness Coalition

10. Organizations favoring taxes • National Retail Federation • International Council of Shopping Centers • E-fairness coalition • International Council of Shopping Centers • American Booksellers Association • Tandy/Radio Shack • Wal-Mart • National Governors Association • National Council of State Legislatures • US Conference of Mayors • National League of Cities

11. Congressional Activity • House Judiciary Committee • Henry Hyde (R-IL) • Prohibited FCC form allowing by the minute charges for ISP • Repealed 1% Federal exercise tax on telephone class • H.R. 3709 Internet Non-discrimination Act • Senate Commerce, Science and Transportation Committee • John McCain (R-AZ) • Filibuster problems • Streamlined Sales Tax Project • Standardized state to state sales tax

12. State Activity: California • August 2000 CA legislature passes law that requires online companies that have brick and mortar shops in CA to collect CA sales tax for CA residents • Barnes and Nobles and Borders cried foul

13. International Activity • WTO – Supported Tax Moratorium • UN wanted $0.01 bit tax for every 100 e-mails (WTO killed) • Organization for Economic Cooperation and Development • Ottawa Taxation Framework Conditions • Uniform taxation scheme for eCommerce where taxation occurs where goods and service are taxed where they are consumed • EU – VAT tax (15-25%) on electronically delivered goods to EU residents • Germany taxed Internet Surfing at work • Andreas Schmidt of Bertelsmann AG  “ German bureaucrats apparently never run out of ideas to prevent economic growth”

14. Services Covered under EU VAT • Broadcasting, including subscription or pay-per-view radio, television and internet services; • Music downloads; • Film, video, images and photographs; • Software, including virus scanning, banner blockers, downloaded drivers, screensavers and search engines; • Text and other information, including online news, instant messages, stock prices, sports results and horoscopes; • Online publications, including books, manuals, newspapers, articles, newsletters, magazines and periodicals; • Online games, including interactive or downloaded software; • Distance teaching, online training and coaching; • Educational material, including encyclopedia, atlas and aerial maps; and Auction services.

15. Companies • Amazon, as the world largest online retailer, stood to lose the most from Internet Taxation • Amazon was not profitable at the time of this debate, Internet Taxation may cause Amazon to go under • Cisco supported INA • Claims state had surplus revenues and state tax codes were too complex…use the time to simplify • Internet Tax Fairness Coalition and American Electronic Association has 5 goals • Do not tax ecommerce more than commerce • Support simplicity • Retain and clarify “nexus” • Avoid new Internet taxes • Consider taxes in global context

16. Internet Taxation Today • US • ITFA extended on October 30, 2007 for 7 more years • Sales Tax Fairness and Simplification Act(H.R. 3396) in hearings • http://www.ncsl.org/programs/fiscal/tctelcom.htm • EU VAT still in place • https://secure.hmce.gov.uk/ecom/voes/welcome.do;jsessionid=26E449F8278200994D04BD766AEC3432 • WTO – no internet taxes • More Info • http://www.cob.sjsu.edu/nellen_a/e-links.html